There are 33.2 million small businesses in America. In today’s competitive job market, finding and retaining top talent has become increasingly challenging. Retirement plans are one of the most requested employee benefits and are significantly less expensive than other benefits.
Safe Harbor retirement plans in particular are a popular solution for small businesses with highly compensated professionals, sheltering the business from having to conduct annual, time-intensive ADP testing.
What Is a Safe Harbor 401(k)?
A Safe Harbor plan is your typical 401(k), but it includes a Safe Harbor Match. This means that the employer provides fully vested contributions to all eligible employees. Some Safe Harbor design options include:
Basic matching
Also known as “elective.” The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation.
Enhanced matching
The company matches at least 100% of all employee 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation).
Non-elective contribution
The company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions.
Qualified Automatic Contribution Arrangement (QACA)
A QACA is an automatic contribution arrangement with special “safe harbor” provisions that exempts 401(k) plans from annual nondiscrimination tests. It is a schedule of uniform minimum default automatic contribution percentages starting at 3% and gradually increases each year an employee participates. An employer must make a minimum of either:
- a matching contribution of: 100% of an employee’s contribution up to 1% of compensation and a 50% matching contribution for the employee’s contributions above 1% of compensation and up to 6% of compensation; or
- a nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute to the plan.
Benefits of a Safe Harbor 401(k)
Implementing a safe harbor plan can be a win-win for both employers and employees. Employers can simplify plan administration, while employees can enjoy greater flexibility and benefits in their retirement planning.
Safe harbor plans are attractive to highly compensated employees who might otherwise be limited in their contributions to the plan due to non-discrimination rules. With a safe harbor plan, highly compensated employees can maximize their contributions regardless of the participation rates of other employees.
Safe harbor plans are also generally easier to administer than traditional 401(k) plans because they do not require annual non-discrimination testing. This can save employers time and money in administrative costs.
Is a Safe Harbor 401(k) Right for My Business?
The answer is yes if you are:
- A smaller business (less than 100 employees)
- Curious about enabling the profit-sharing feature on your plan
- Eager to avoid penalties for failing IRS top-heavy testing
- Trying to attract and retain employees
How Does a Safe Harbor Plan Work?
For the plan sponsor, a Safe Harbor plan means that Highly Compensated Employees (HCEs), usually business owners or employed family members, will be able to contribute a higher percentage of their pay to a retirement plan than they would be without a Safe Harbor Match. This enhancement occurs because the government waives many of the nondiscrimination tests that reduce or remove an HCE’s ability to defer larger amounts than the company’s Non-HCEs. The Safe Harbor Match contribution is also a corporate deduction.
For employees, a Safe Harbor plan ensures that all eligible participants have equitable access to an employer match on their retirement savings. This enhancement allows the company to make a commitment to its employees as an alternative form of compensation and/or bonus.
Is the Plan Design Flexible?
Yes! Safe Harbor plans are not one size fits all. We will help you find the best match for your business. The Safe Harbor 401(k) Plan from Leading Retirement Solutions is a dynamic retirement plan design option that allows business owners to maximize plan contributions while also offering a desirable benefit to employees. You may be a company with hundreds of employees or an entrepreneur just starting out. We offer fully customizable solutions so that we can help you implement a retirement plan designed to meet your company goals. Employers that already have a plan and want a different design can look at upgrading an existing plan, and smaller employers that want to share the administrative load often consider a pooled employer plan.
Do You Have to Offer a Plan at All?
For a growing number of small businesses, yes. A number of states now require employers above a certain size to either offer a qualifying retirement plan or enroll their employees in a state-facilitated program, and a safe harbor 401(k) is one of the designs that satisfies the requirement while also solving the testing problem. Our guide to which states have mandatory retirement plans covers who is affected, and the state retirement mandate map shows the current position and deadline for every state.
Helpful Resources
- IRS, 401(k) plan overview — how safe harbor plans differ from traditional 401(k) plans, and the conditions for the top-heavy exemption.
- IRS, Safe harbor plans under sections 401(k)(12) and 401(k)(13) — the contribution, notice and vesting requirements for traditional safe harbor plans and QACAs.
- IRS, ADP and ACP nondiscrimination test failures — what happens without safe harbor status, and how the corrections work.
- IRS, COLA increases for dollar limitations — the current highly compensated employee threshold and annual contribution limits.
- IRS, Publication 560 — plan options, deduction rules and startup credits for smaller employers.
For tips and information regarding retirement plans, contact us.
